The effect of earnings management on audit fees. Evidence from the manufacturing industry

Abstract

This study focuses on understanding the effect earnings management has on audit fees. Earnings management is studied by examining real earnings manipulation through sales manipulation and overproduction.

The study is done using an OLS regression analysis. The sample consists of companies in the manufacturing industry, chosen using two-digit SIC codes, data collected from the COMPUSTAT and AUDIT ANALYTICS databases. Observations are from US based firms, total of 9541 firm-year observations during the period of 2008 to 2014.

The results suggest that earnings management through sales manipulation and overproduction are inversely associated with the audit fee, suggesting that higher quality auditors decrease earnings manipulation practices.